Insights & White Papers

Creating an Outcome-Based IT Budget
Using a Zero-Based Budgeting Approach

By Mike Magnifico

Business & Technology Strategy

Zero-based budgeting starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. Zero-based budgeting aims to put the onus on managers to justify expenses, and to drive value for an organization by optimizing costs and not just revenue. Is this budgeting approach right for you? Review Liberty's 4 step process to implement this zero-based budgeting process.

Using a Zero-Based Budgeting (ZBB) approach enables businesses to create an outcome-based budget for IT initiatives.   ZBB is an approach that organizations use to review and approve every dollar in an annual budget.  Budgets start from a zero-base which allows organizations to make a fresh decision on budgets and build a culture of cost accountability.   The ZBB approach brings focus on savings from not just the “what” but the “how.”

Zero-Based Budgeting versus Traditional Budgeting

Traditionally, IT budgeting takes more of an accounting approach that merely adds funds on the prior year’s budget for undetermined uses.   

“We just add 3%-5% to last year’s budget and adjust from there”, sound familiar?

Typically, an IT leader subjectively ranks and prioritizes both business and internal IT needs against a non-fact and outcome-based funding number. Doing so requires justification for only variances versus results from the preceding year based on the assumption that a “business-as-usual” budget is automatically approved.

Adopting Zero-Based Budgeting Approach

Rather than budgeting-as-usual, ZBB is a decision-making approach that requires the approving and tying of every line item in the IT budget to a business outcome. The ZBB method opens with no assumptions about what level of funding it will take to RUN, GROW, and TRANSFORM the business for the next twelve months. The budgeting process is therefore entirely independent of whether the budget or specific line items are increasing or decreasing but is the starting point for a fact and outcome-based discussion.

Adopting an outcome-based ZBB approach for your IT department may seem like an intimidating task, but when weighed against the strategic value of having IT aligned with business objectives, the effort is well worth the results.

When looking at your in-flight projects today, would (or should) any of the organization’s strategic initiatives make one of the selected IT initiatives obsolete?   Where should you prioritize your security, compliance and customer mandated projects?

Each organization has to take a pragmatic assessment of whether or not the planned (or “obligated”) IT initiatives align with and support the organization’s strategic objectives. Should any initiatives that were not selected for the budget be reconsidered? Are there overlapping or redundant capabilities that could be addressed by consolidating initiatives?  When reviewing initiatives, an organization should think of the IT department budget as three distinct components:

Run Grow and Transform IT budgeting


Zero-Based Budgeting Key Implementation Steps

Implementing outcome-based ZBB for an IT department involves these key steps: 1. identifying and aligning business objectives, 2. evaluating alternative ways to accomplish each objective, 3. defining and agreeing on funding sources, and 4. setting priorities.

The main activities should continuously ask “Why?” and “What are the outcomes if we do not take on this initiative right now?”

The purpose of the process is to drive and align focus on key objectives to eliminate activities no longer relevant to those objectives supporting the desired outcomes.

Step 1:
“Define and Identify” your business objectives
Start with outlining the organization’s directives and understanding of the desired outcomes.   ZBB concepts should be outlined and presented to all levels of an organization so they can begin to develop and collect proposals for spend.  After completing that exercise, organize proposals by their importance. Next, shift proposals upward for more intense study and judgment by top leaders in the organization. The primary difference in this process is that every dollar of IT spending should go through the same rigorous review process.

Steps to Outcome Zero Based BudgetStep 2:
“How?” What are the approaches to accomplish the objectives?
When developing a proposal, define the details at a level that helps with organizational comprehension. Only in this manner will the owner be able to formulate meaningful alternatives. Initiative and business process owners must look at all methods and choose the alternative way of achieving the objective they prefer best.

Step 3:
“How much?” What are the costs for the outcome?
Initiative and business process owners will establish a minimum level of effort and then break out additional levels of funding for evaluation. Reviewing all funding levels may lead to a modification or redirection of selected submissions. This effort helps push initiative owners to rethink their estimates upfront and add validity to the overall process.

Step 4:
“When?” In which quarter do we expect to start and when should we see the outcome?
A cost-benefit analysis will help identify the priority of the proposals. The ranking process combined with a final cost-benefit figure will provide management with an effective way to allocate resources and communicate direction. (Who does this? Who makes the final decision?)

Zero-Based Approach Summary

Using a ZBB approach is a repeatable process that forces alternative thinking in setting yearly budgets. ZBB can drive significant and continual savings by building a culture of cost accountability at all levels of the organization. The ZBB approach allows organizations to realize bottom-line savings, improved organizational efficiencies, improved organizational alignment and drive measurable future growth.


Pros and Cons of Zero Based Budgeting


Liberty can help your annual planning process for IT by pragmatically redesigning a cost structure to drive Business/IT alignment and value.

Liberty Advisor Group is a mission-focused advisory and strategic consulting firm. We partner with our clients to solve their most complex business issues and improve enterprise value. Our experienced team has a proven track record in Business and Technology Transformation, Data Analytics, Business Threat Intelligence, and Mergers and Acquisitions. We offer original thinking combined with factual data to develop comprehensive, situation-specific solutions that work. With straight talk and proven results, we accelerate growth, drive efficiency and reduce risks. We are experienced. We are doers. We are Battle-Tested.

Mike Magnifico By Mike Magnifico

Let Liberty help your annual IT budget planning process by designing a cost structure to drive alignment and value.